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Allbirds: Serious Issues Roost Here

Thomas Paulson
Dec 2, 2022
Allbirds: Serious Issues Roost Here

  • Allbirds' weak 3Q22 results and 4Q22 guidance will only work to further agitate anxieties about the brand's business model and its expansion plans. TTM EBITDA and free cash flow didn’t materially change in trajectory and landed at -$55M and -$123M, respectively, and its cash position deteriorated from $207M to $181M. In-line with management’s expectations of flat YoY revenue growth and the highly promotional environment for athletic and athleisure footwear, those TTM figures and the cash positive are likely to worsen in 4Q22 and 1Q23.
  • To drive revenue to stabilize cash burn the company is aggressively expanding its wholesale business into Dick’s Sporting Goods, REI, Nordstrom, and others. As announced last quarter, the company has undertaken a cost efficiency program (i.e., its “Simplification Initiative”). However, at $14M in planned savings relative to a FCF burn of $30M per quarter, it’s not enough to stem the cash bleed. Robust top-line growth, higher gross margins, and faster inventory turns are required.
  • On its quarterly call, management blamed the macro and weak mall traffic for its results. We delved into to better corroborate and understand the dynamics of its U.S. locations– now up to 38 and twice last year’s number. indexes roughly half of these. Within’s lens, the locations at The Forum Carlsbad and Derby Street Shops produce the most traffic at 3.5X the lowest traffic locations at Bethesda Row and University Village (Seattle). Of the nine shopping center locations in, five are producing more traffic than 2019 and four have declines. Of these four, there is only one large volume store within a center that is suffering large traffic declines, which is the Atrium Mall next to Harvard University. A lower volume store in the Stanford Shopping Center, near Stanford University, is also experiencing large center traffic declines. The declines compared to 2019 at these two centers are severe at approximately 28% prior to October and they hit Allbirds hard as the conversion rate of traffic from the center to the retailer is abnormally high at 8%. In contrast, at Allbirds' other centers, the conversion rate was only 0.4% to 1.6%, a level that is so low that it’s hard to believe that the overall +/- traffic of the center was deterministic to Allbirds' ability to attract shoppers and drive sales at these locations. The other center with large declines is Bethesda Row, but this Allbirds location is one of their low-volume locations. For example, visits to the Bethesda Allbirds location is only 15% of that in The Forum Carlsbad.
  • When examining the conversion data, we noticed that Allbirds locations have a seasonality to their conversion rate, with summer months far higher than other periods. This is shown in the chart below (we normalize each location’s conversion rate by taking it against its own average). This foretells of a very soft 1Q23 revenue- and profit-wise, especially given ongoing business headwinds in China and Europe (its two largest markets beyond the U.S.)

  • Why might the Atrium Mall and Stanford Shopping Center be suffering such a large decline in visitation vs. 2019? Well one commonality is that both neighbor large universities that had a large base of international students, especially from China. As those Chinese nationals are down by nearly half as shown in the figure below which came from an article in The Chronicle of Higher Education. As such, we would characterize the decline at these shopping centers as more the result of changes in local market conditions vs. say a decline in the consumers’ willingness to visit shopping centers (which is what management implied).
  • On its 3Q22 update call, management sounded frustrated by the store performance. Clearly, the fast pace of openings has resulted in the business’s P&L being loaded with store expenses and rent, which we estimate to be $40M annualized. To offset that expense, Allbirds needs to generate an additional $100M in full-margin revenue, or +32% above the current run-rate.
  • Management shared that its pre-pandemic comparable stores have yet to return to their prior sales productivities. New stores are taking longer to ramp than management planned. Allbirds CFO Mike Bufano stated, “We're thinking about capital efficiency in an era of greater uncertainty with where the consumer is at.”
  • We estimate that stores will produce $660 in sales per square foot this year, or $2,303 per square foot when including e-commerce revenue. (Allbirds considers itself an omnichannel brand and we would agree with the characterization.)
  • In our Allbirds Tenant Overview report, we highlighted one of the risks to its business was slow inventory turns. Turns continue to worsen and they are now down to only 1.0X, which is sucking up a lot of cash and resulting in clearing unsold goods via third-party liquidators (while only collecting cents on the dollar).  
  • While On Running, isn’t a direct competitor, it’s "near" enough to contrast its transaction with consumers and its business execution to Allbirds’. On Holdings expects U.S. revenue growth of over 45% for 4Q22, while Allbirds expects to be flattish despite a revenue base that is half the size of On Holdings. Why is the Cloud Flyer (On) continuing to charge up the mountain, whereas the Tree Flyer (Allbirds) flagging? Three reasons in our view. First, On Running sales mix is heavily performance-based athletic footwear versus Allbirds sales mix being heavy athleisure which is in less demand due to the consumer shift away from cozy/comfy in-the-home wear. It’s also a category that is suffering a glut of product in the face of faltering demand. This is something that both Adidas and Nike have alluded to. Second, On Holdings is turning inventory faster (2.3X versus 1.0X) which allows for more newness to flow onto store shelves and faster sell-throughs. This also keeps its retailer customers happy and ordering more. Third, given those happy retailer customers, On Holdings is being given more stores and shelves to load product (i.e., more wholesale expansion relative to Allbirds, which is just getting started in wholesale). For 4Q22, On Holdings' U.S. wholesale revenues will increase by +$25M compared to Allbirds' +$5M. On Holdings' worldwide wholesale door count reached 9,050 in September versus 8,000 at the start of the year.
  • What’s behind On Running’s strong sell-throughs? Co-Founder David Allemann on its earnings call said, “We are expanding the reach of the brand like never before. On has seen a record number of visitors coming to our website, with almost 10 million sessions per month recorded so far this year. Our Instagram followers just crossed the 1 million and engagement is high. We are attracting new consumers every day due to our ability to drive awareness and then meet their individual needs once we have gained their attention. We are doing this in a number of ways, not least, via are our highly successful omnichannel approach.” That size of followers is over 2X that of Allbirds. In the industry’s lingo, it appears that On is generating more “brand heat” than is Allbirds. As shown in the figure below, On is gaining substantially more search interest over Allbirds (per Google Trends). Given Allbirds was originally a highly successful digitally native brand this is perplexing. However, it also suggests that On’s higher brand heat is driving more visitation to its retail partners' locations and shopping centers. And so perhaps Allbirds’ has opportunity to improve its brand heat and marketing effectiveness. And should it do so, visitation to its stores should improve.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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